Why ESG, why now?
One of the lessons from the present crisis is that the common methods used in assessing financial risks are outdated. In most applications, risks are only managed restrictively through short term quantitative frameworks.
The problem is that quantitative models tend to rely on narrow assumptions. Many of these assumptions have been invalidated.
It is hard to quantify precisely issues like bad corporate governance, misuse of resources or lack of transparency in a balance sheet with traditional quantitative models.
However, we believe that coherent ESG frameworks allow the investors to better integrate these important elements in the investment process and therefore add significant value.
RISK
- Regulatory action - Stricter legislation on environment, labour issues, manager compensation
- Loss of value - increased frequency of corporate scandals from Enron to subprime. Costs are multiplied through expensive litigation
- Macro issues - Long term demographic, food / energy security and other thematic issues are increasingly important in a delevering system
OPPORTUNITY
- Alignment – incentivisation of mangement and alignment to investor objectives
- UN PRI branding opportunity – incorporating ESG into investment analysis and decision making
- Significant asset class – since 2003 the broader responsible investing market has grown 22% annually (global AUM growing at 10% only) reaching US$5trillion by 2007 7% of AUM. Going forward RI is expected to reach 15%-20% global or US$26.5trillion of global AUM by 2015 [Robeco, Booz & Co.]
